The City of Detroit on Friday secured a $350-million loan that is contingent on the approval of the city's bankruptcy filing. / Carlos Osorio/Associated Press

Written by

Brent Snavely and Nathan Bomey

Detroit Free Press Business Writers

The City of Detroit found a bank willing to lend it up to $350 million to pay off a disastrous Wall Street bet from the Kilpatrick administration, to reinvest in public safety and to soften future cuts to retirees’ pensions.

The commitment from London-based Barclays, a major international bank, is a win for the city because it shows the banking community is still willing to consider investing in Detroit, as long as a federal judge approves the city for bankruptcy protection and major restructuring.

To get the loan, the city had to agree to terms that are favorable to Barclays, which would get priority over unsecured creditors — such as general obligation bonds and pensioners — if the city became unable to make payments.

The city said it is pledging a combination of income and casino tax revenues and the “net cash proceeds” from any money from the sale of city assets more than $10 million. Assets would only be pledged if they are sold for cash, so that means art owned by the city that resides at the Detroit Institute of the Arts is unlikely to be used as collateral for this deal.

“There’s nothing new in here in terms of a potential threat to the collection,” said DIA chief operating officer Annmarie Erickson. “It’s reassuring that the collection is not specifically called out.”

The city believes the loan will give it a powerful new lever as it heads into hearings next week to determine the city’s eligibility for Chapter 9 bankruptcy. That’s because receiving the money from Barclays is contigent on U.S. Bankruptcy Judge Steven Rhodes declaring the city qualified for bankruptcy protection.

News of the deal sparked immediate opposition from the American Federation of State, County and Municipal Employees, the city’s largest union, which said the deal benefits banks more than residents and employees.

“This is a bad deal for the City of Detroit,” said Steven Kreisberg, collective bargaining director for AFSCME, because the bulk of the loan from Barclays will be used to repay its contractual obligations to other banks. “Once again, the city is pledging the city’s revenues as security on a debt.”

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If approved, the loan would be used to settle a claim from UBS and Bank of America Merrill Lynch, which hold city debt from a soured Wall Street bet backed by the city’s casino tax revenues. The so-called interest rate swaps — which tried to lock in steady interest rates on a $1.44-billion loan in 2005 for the city’s two pension funds — were a disaster and left the city holding the bag for hundreds of millions.

Detroit emergency manager Kevyn Orr — desperate to free up casino tax money to pay for restructuring city services — has proposed a settlement with the banks for 75 cents to 82 cents on the dollar to clear the debt and unlock the casino money. The proposed settlement has been extremely contentious, generating challenges from many creditors and pensioners who will likely get far less on the dollar for their claims.

Orr’s proposed swaps settlement must be approved by Rhodes. And Barclays won’t make the loan unless Rhodes gives that approval, too.

The city plans to use about $230 million from the new financing, which carries a minimum interest rate of 3.5%, to pay off the swaps debt.

The rest of the cash will be used to reduce blight, invest in police and fire protection and technology infrastructure, the city said. It will also be used to “improve the future recoveries of its creditors, including retirees, as part of its restructuring process,” the city said in a news release.

The city said it contacted a total of about 50 financial institutions with experience in municipal or special credit situations and initially had interest from about 30 lenders. About 16 “high-level” proposals were reviewed by the city and Miller Buckfire, and those 16 were narrowed down to four finalists.

“This financing was the result of a highly competitive process which has resulted in an attractively priced and structured financing for the City of Detroit,” Ken Buckfire, copresident of Miller Buckfire and the city’s investment banker, told the Free Press.

The city plans to file a motion in Bankruptcy Court in late October or early November asking Rhodes to sign off.